Budget CGT and neg gearing reform Bill introduced

The Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 has been introduced into Parliament this morning (Thurs 28 May 2026). It implements some of the 2026-27 Budget changes (but not all) announced on 12 May 2026, as follows:

CGT discount changes
The Bill (and the accompanying Imposition Bill) will amend the income tax law to:

• Replace the 50% CGT discount for individuals, trusts and partnerships with cost base indexation from 1 July 2027;
   
• Impose a 30% minimum tax on capital gains. This reduces the benefit to taxpayers of deferring realisation to years in which their marginal tax rates are low. It also ensures that capital gains face a tax rate that is closer to the tax rate most taxpayers face during their working life. Certain income support recipients will be exempt from the minimum tax to ensure that low‑income, low-wealth individuals are not adversely affected.
   
• Ensure these new arrangements apply to all capital gains arising from 1 July 2027 onwards. This includes assets owned prior to but disposed of after 1 July 2027, in respect of gains arising after that time, and assets purchased and disposed of after this date. The amendments also provide transitional arrangements for all CGT assets (other than new builds and affordable housing, which benefit from specific concessions) to ensure that existing arrangements continue to apply to assets acquired and disposed of before 1 July 2027 and capital gains accrued prior to 1 July 2027.
   
• Bring pre-CGT assets (legacy assets held before 1985) into the CGT base for gains accruing after 1 July 2027. Gains on pre-1985 assets accrued before 1 July 2027 continue to be exempt from CGT.
   
• Provide transitional arrangements for other legacy CGT assets purchased between 1985-1999 for which the 50% CGT discount or indexation under prior indexation rules could apply. Under these amendments, after 1 July 2027, individuals and trusts can only use the 50% CGT discount in respect of gains accruing before this date. Eligible companies, foreign residents and temporary residents will remain eligible for the previous cost base indexation arrangements under the current rules (with cost base indexation available only up to 30 September 1999).
   
• Allow individual investors in new residential dwellings to choose between a 50% CGT discount and the new arrangements. This maintains incentives for investors to supply new housing.
   
• Allow investors in affordable housing to choose between the current CGT discount of up to 60% and the new arrangements. This maintains incentives for investors to supply affordable housing.

Note there will be no changes to the operation of the small business CGT concessions.
Date of effect: These measures will largely apply in relation to assessments for the income year that includes 1 July 2027 and later income years.

Institute of Financial Professionals Australia comment: In relation to the issue of how capital losses will be applied, it seems that capital losses will be first applied against the discount component of any capital gain – rather than apportioned between the discount component and the indexed component (if relevant).
 
Negative gearing changes
The Bill provides that expenses relating to residential dwellings used or held as residential accommodation can only be deducted against:

• assessable income from residential dwellings used or held as residential accommodation subject to quarantining;
   
• net income from such properties not subject to quarantining; or
   
• revenue or capital gains on residential dwellings.

The Bill also provides that the requirement to quarantine net rental losses from residential dwellings used or held as residential accommodation does not apply to new residential dwellings, residential dwellings for an activity or purpose determined by the Minister by legislative instrument, residential dwellings for a business or enterprise of a kind determined by the Minister, or residential dwellings acquired before 7.30pm (AEST) on 12 May 2026.

The requirement to quarantine amounts also does not apply to an amount incurred in providing a fringe benefit or to widely held trusts, complying superannuation entities, or an entity in a class of entities determined by the Minister by legislative instrument.

The Bill also ensures that any quarantined amount that an entity has accrued that could be carried forward is extinguished if the entity is declared bankrupt.

Date of effect: These measures apply to income years commencing on or after 1 July 2027.
 
Standard deduction for work-related expenses
The Bill introduces a new specific deduction into the ITAA 1997 that allows individuals who are Australian tax residents to claim a standard deduction for work related expenses each income year of the lesser of $1,000 and their total assessable labour income.

This standard deduction is reduced, dollar-for-dollar, by general and specified work-related expense deductions claimed (including certain transport, car, repair, capital allowance and COVID-19 test deductions) so that taxpayers do not receive a double benefit, while deductions such as income protection type insurance premiums and union or other trade, business or professional association memberships, and deductions not related to assessable labour income, remain unaffected.

The Bill aligns existing substantiation and capital allowance rules with the new standard deduction by removing small amount substantiation concessions for work-related expenses, repealing related provisions and definitions, and updating the transport expense rules. The amendments prevent new depreciating assets that are mainly used to produce assessable labour income from being allocated to a low-value pool. It also has an optional fixed-reduction method for calculating balancing adjustments and capital gains or losses for depreciating assets used to derive assessable labour income where the taxpayer has relied on the standard deduction, instead of retaining records of how much they used the asset for certain purposes.

The Bill also make accompanying amendments to the FBTAA so that the:

• otherwise deductible’ rule does not apply to expense payment fringe benefits for work-related expenses covered by the standard deduction and provided under a salary packaging arrangement; and
   
• the FBT exemption for eligible work related items is limited to benefits that have not been provided under a salary packaging arrangement and is no longer limited to substantially identical items.

The amendments to the FBTAA ensure the standard deduction cannot be combined with salary packaging arrangements entered into by an employee with their employer that could result in a double tax benefit being received.

Date of effect: The amendments to the income tax laws apply in relation to assessments for the 2026 27 income year and later income years. The amendments to the FBT laws apply in relation to FBT years starting on or after 1 April 2027.

Working Australians tax offset
The Bill amends the income tax law to introduce the working Australians tax offset (WATO) – being a non-refundable tax offset that provides targeted tax relief to Australian resident individuals who earn labour income. It will provides a maximum benefit of $250 to eligible individuals. Individuals with income tax payable above $250 on their net labour income will be entitled to the full amount of the WATO.

Date of effect: This measure applies to the 2027-28 income year and later income years.

Other
The Bill has been automatically referred to the Senate Economics Legislation Committee, for report due by June 22.

See Treasurer’s accompanying media release here.